Under the Income Tax Act, 2025, prosecution rules in sections 473 to 485 and 494 are proposed to be reworked to make punishment lighter and more proportionate. Wherever the law now provides rigorous imprisonment, it is proposed to shift to simple imprisonment. The maximum jail term is proposed to be capped at two years in most cases, and three years for repeat offences. Cases will be graded by amount, with fine only where tax evaded does not exceed ₹10 lakh.
sharp changes
TDS and TCS offences see sharp changes. Two TDS offences are proposed to be decriminalised, non-deposit on lottery or crossword winnings and on business benefits or perquisites. For TDS on online games and virtual digital asset transfers, cases wholly in kind are kept out of criminal liability. Other cases are graded. Above ₹50 lakh can mean simple jail up to two years or fine or both; ₹10 lakh to ₹50 lakh up to six months or fine, or both, else fine. The same grading is proposed for failure to deposit TCS collected.
The same graded-by-amount approach is proposed for other prosecution provisions, too, including wilful attempt to evade tax and failures to furnish returns, again using ₹10 lakh and ₹50 lakh as the key cut-offs for ‘fine only’ versus jail-plus-fine cases. For repeat offences, the maximum term is proposed to be reduced to three years (from the higher maximum currently prescribed).
Search rules are proposed to be made more targeted and time-bound. If undisclosed income belongs to an “other person” and relates to only one tax year, the block period for that person will be limited. Also, the block assessment time limit will run from search or requisition start, and will be extended from 12 months to 18 months.
On the civil side, the Budget proposes turning some technical-delay penalties into fees. Delay in getting accounts audited will attract ₹75,000 or ₹1,50,000. Delay in filing the transfer pricing accountant report will attract ₹50,000 or ₹1,00,000. Delay in filing SFT and reportable account statements becomes a fee, with a ₹1,00,000 cap in certain notice-linked cases.
To cut parallel proceedings, under-reporting penalty will be built into the assessment order. Interest for non-payment under section 220(2) is proposed to apply only after the first appellate order, as applicable.
Two other changes stand out — penalty for ignoring information requests rises from ₹1,000 to ₹25,000 from April 1, 2026; tax on unexplained income falls from 60 per cent to 30 per cent, with the separate penalty section dropped.
Also, immunity is extended to misreporting if taxpayers pay 100 per cent extra tax, or 120 per cent for unexplained income; similar relief is proposed under section 270AA.
Published on February 1, 2026
